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IASB proposes amendments to IAS 1 regarding the classification of debt with covenants

  • IFRS - IASB Image

Nov 19, 2021

On November 19, 2021, the International Accounting Standards Board (IASB) published the exposure draft "Non-current Liabilities with Covenants (Proposed amendments to IAS 1)" to clarify how conditions with which an entity must comply within twelve months after the reporting period affect the classification of a liability. The deadline for submitting comments is March 21, 2022.

 

Background

In January 2020, the Board issued Classification of Liabilities as Current or Non-current, which amended IAS 1, Presentation of Financial Statements. The amendments clarified how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances. The amendments are effective for annual reporting periods beginning on or after 1 January 2023, with earlier application permitted.

In December 2020, the IFRS Interpretations Committee published a tentative agenda decision in response to informal feedback and enquiries about how an entity applies the amendments to particular fact patterns. After considering feedback to its tentative agenda decision, the Committee handed the matter over to the IASB as that feedback provided information about situations the Board did not specifically consider when developing the 2020 amendments.

In response to that new information, the Board tentatively decided to amend IAS 1 with respect to classification (as current or non-current), presentation and disclosures of liabilities for which an entity’s right to defer settlement for at least 12 months is subject to the entity complying with conditions after the reporting period.

 

Key proposals

The main proposals in ED/2021/9 Non-current Liabilities with Covenants (Proposed amendments to IAS 1) would: 

  • Modify the requirements introduced by Classification of Liabilities as Current or Non-current on how an entity classifies debt and other financial liabilities as current or non-current in particular circumstances: The Board proposes that conditions an entity must comply with within twelve months after the reporting period would have no effect on whether an entity has the right to defer settlement of a liability for at least twelve months after the reporting period, i.e. such conditions have no effect on the classification of a liability as current or non-current. When an entity classifies such a liability as non-current, however, it would be required to disclose information that enables users of financial statements to assess the risk that the liability could become repayable within twelve months. An entity would also present separately, in its statement of financial position, liabilities classified as non-current for which the entity’s right to defer settlement for at least twelve months after the reporting period is subject to compliance with certain conditions within twelve months after the reporting period.
  • Defer the effective date of the 2020 amendments to no earlier than 1 January 2024.

The deadline for submitting comments on these proposals is 21 March 2022.

 

Effective date

The Board intends to decide on the effective date after exposure, but the date would be no earlier than January 1, 2024. The amendments would be applied retrospectively in accordance with IAS 8. Earlier application would be permitted.

 

Alternative views

The exposure draft contains alternative views by two Board members. Both members dissented because they disagree with the Board’s proposal to require an entity to present separately, in its statement of financial position, non-current liabilities subject to covenants. They would have preferred these conditions to be communicated through the notes to the financial statements.

 

Additional information

 

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